Recovery and Resolution Plans for Globally Systemically Important Insurers by Mid-2014

Introduction

On 31 May 2012 The International Association of Insurance Supervisors (the “IAIS”) published a consultation paper (endorsed by the FSB) concerning its proposed assessment methodology for the identification of globally systemically important insurers (“G-SIIs”), being any insurer “whose distress or disorderly failure, because of their size, complexity and interconnectedness, would cause significant disruption to the global financial system and economic activity”.

The Assessment Methodology

The assessment methodology is based broadly on that used to identify globally systemically important banks (“G-SIBs”) but tailored to the insurance industry.  In developing the methodology, the IAIS took account of the apparent absence of evidence to suggest that traditional insurance business either generates or amplifies systemic risk.  Accordingly, in determining whether an insurer is a G-SII, more emphasis is placed on those insurers who participate in non-traditional and non-insurance activities, such as derivatives.

The proposed assessment methodology involves three steps:

  • Collection of data;
  • Methodical assessment; and
  • Supervisory judgment and validation.

Collection of data

To ensure the quality and relevance of underlying data, the IAIS based is assessment on data requested from 48 of the largest insurance groups active across 13 jurisdictions as of year-end 2010.

Methodical Assessment

The IAIS proposes to measure ‘systemic importance’ in terms of the impact that distress or failure of an insurer might have on the global financial system and the wider economy rather than in terms of the probability of a failure of the insurer in question.  An indicator-based approach based on the five categories listed below is proposed.  This will provide a first indication of the relative importance of each insurer under consideration.  Within each category are a number of indicators the purpose of which is to capture the degree and nature of each insurer’s systemic importance.

Category

Indicator 

Size

Total assets

Total revenues

Global Activity 

Revenues derived outside of home country

Number of countries

Interconnectedness 

Intra-financial assets

Intra-financial liabilities

Reinsurance

Derivatives

Large exposures

Turnover

Level 3 Assets (i.e. assets the fair value of which cannot be   determined by using observable measures)

Non-traditional   and Non-insurance Activities 

Non-policy holder liabilities   and non-insurance revenues

Derivatives trading (notional CDS protection sold)

Short-term funding

Financial guarantees

Variable annuities

Intra-group commitments

Substitutability

Premiums for specific business lines

In addition, it seems likely that the final methodology will incorporate additional factors, such as:

  • The amount (in economic terms) of derivatives trading without hedging purposes; and
  • The liquidity of insurance liabilities.

Relevant Importance of each Category

The two most important categories for assessing the systemic importance of insurers are:

  • Non-traditional insurance and non-insurance activities – because the longer timeframe over which insurance liabilities can normally be managed (which is considered to be a mitigating factor in assessing systemic risk) may not be present; and
  • Interconnectedness – because of the strong connections between the insurance and banking sectors.

Calculating Systemic Importance

The Assessment Methodology will be used to calculate a systemic importance ranking of all of the 48 insurance companies under consideration.  The overall score for a particular insurer is calculated as the sum of all of the weighted category scores for that insurer.  In turn, each category score is calculated as the amount that the insurer in question represents with respect to that category as a proportion of the entire sample for the category in question, after weightings are applied.  Within a category, all indicators are given an equal weighting.  As a result, category weightings are very important to the calculation.  The weightings assigned to each category are:

Category

Weighting

Non-traditional insurance and non-insurance activities

40%-50%

Interconnectedness

30%-40%

Size

5%-10%

Global Activity

5%-10%

Substitutability

5%-10%

At this point a number of methodologies will be employed in order to determine the cut-off point between G-SIIs and non-G-SIIs, one being a comparison of publicly available data which is common to all of the insurers under consideration as well as G-SIBs.

Supervisory Judgment and Validation

The Supervisory judgment and validation stage introduces both a qualitative as well as an quantitative assessment, in recognition of the fact that no single methodology can perfectly measure systemic importance across all global financial institutions.  Additional analysis will be conducted in order to validate the results of the indicator-based approach conducted under the “Methodical Assessment” section.  This analysis (the “IFS Assessment”) divides the business portfolio of an insurer into:

  • Traditional insurance;
  • Semi-traditional insurance;
  • Non-traditional insurance;
  • Non-insurance financial; and
  • Industrial activities.

Again, risk weightings are used to calculate systemic importance, the highest ratings being allocated to the “Non-insurance financial” and “Non-traditional insurance” categories.  The findings are then compared to the results from the indicator-based approach to provide a check on their reasonableness and to assist informed discussions with relevant group-wide supervisors.  Based on these assessments and discussions, the IAIS will determine if additional analysis is required, or whether an insurer should be added to the list of G-SII candidates.  Once a candidate list is finalised, the IAIS will make recommendations as to which insurers should be regarded as G-SIIs to the FSB, who will ultimately make the decision.

Policy Measures for G-SIIs

The IAIS will develop policy measures to be applied to G-SIIs, which will be the subject of a separate consultation exercise later on this year.  The measures are likely to include:

  • More intensive and co-ordinated supervision of SIFIs;
  • A requirement to develop Recovery and Resolution Plans on the basis set out in the FSB’s “Key Attributes for Effective Resolution Regimes”; and
  • Higher loss absorbency for SIFIs to reflect the greater risks that these institutions pose to the global financial system.

Timeline

An initial list of G-SIIs is expected from the FSB in the first half of 2013 and a revised list of G-SIIs is to be published in November every year.  The IAIS expects that the G-SII measures would be applied with an 18 month time lag compared to those for G-SIBs due to the different overall timetable concerning the G-SIFI insurance project.  This would mean that Recovery and Resolution Plans would be expected to be in place by mid-2014 for G-SIIs compared with the end of 2012 for G-SIBs.

The IAIS consultation paper is open for comment until 31 July 2012.  The consultation paper, press release and FAQ document are all available here:

http://www.iaisweb.org/Consultations-918

 

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